An unseasonably cold and lengthy winter took a toll on economic activity and housing markets at the start of 2014. While weather impacts imposed a temporary hurdle on the ongoing recovery in housing, other factors continue to depress demand. For both rental and owner-occupied housing markets, weak household formation in the face of otherwise strong demographic prospects remains a fundamental challenge.
There's no doubt that weather effects sapped some of the momentum that housing possessed in 2013. In fact, the overall economy had a terrible first quarter. The advance estimate of gross domestic product growth from the Bureau of Economic Analysis was only 0.1 percent. Many economists now expect that estimate to be revised downward, thus revealing that the economy contracted at the start of 2014. And a pause in the growth of housing related economic activity was a notable drag during the last two quarters.
There are a number of reasons why. Among these are various supply chain issues for builders, including access to lots, labor and lending. Policy uncertainty regarding the future of the housing finance system and certain expired tax policies also have had impacts on both housing supply and demand. Enacting comprehensive housing finance reform, along the lines of the proposal by Sens. Tim Johnson, D-S.D., and Mike Crapo, R-Id., would undoubtedly be a plus for the long-run health of housing demand. That proposal would replace Fannie Mae and Freddie Mac with a sustainable system that includes private capital and policies to ensure a liquid secondary market with national coverage of housing markets.
Beyond policy issues, and despite economic improvements that include household balance sheet repair, the current weak rate of household formation acts as a brake on housing demand. New households form as individuals move out from homes of family and friends and occupy a separate rented or owned residence. However, one of the negative economic impacts of the housing crisis and the Great Recession was a rise in “doubling up” and young adults living with parents. In many cases, younger workers do not have the economic resources to rent or purchase their own home. This is due to rising student loan debt, as well as weak income growth and higher rates of unemployment for younger workers
The impacts of these economic conditions are clear. The red dashed line in the chart above is a simple linear trend of total household formation growth, taking the 2001 through 2003 period as a normal or baseline level. The years of the housing boom (2004 through 2007) experienced an acceleration of household formation, as the net count of total households rose quickly. However, after the Great Recession the rate of formation of both renting and owning households slowed considerably, falling and remaining below trend.
From 2002 to 2005, approximately 1.4 million new households were forming annually. Since 2009, the average annual rate has fallen more than half to about 600,000 per year. More striking, since the end of 2009, virtually all the growth in new households has been attributable to increases in the count of renter households, which increased more than 2.5 million from the end of 2010 to the end of 2013.
And recent months has seen especially weak growth for households. While there are seasonal cycles in the data (in part, linked to academic year calendars), there has essentially been no net growth in the monthly count of households since August of last year. This lack of household growth is a symptom of underlying weakness for job creation and wage growth.
And it’s important to keep in mind the long-run demographic and economic consequences of these impacts. For example, if individuals are not moving out from their parents’ home, they are unlikely to be getting married or having children. In fact, the number of marriages declined more than 9 percent from 2001 to 2011, despite a rising population. And the birth rate in the United States fell from 14.3 births (per 1000 people) to 12.6 in 2012. Housing also remains a key component of a typical American’s wealth, so delays in homeownership will have long run consequences on the wealth of younger families.
While some of the recent slowdown in housing can be blamed on weather factors, data in the coming months will reveal how much. And to the extent that underlying economic weakness, particularly for new renters and prospective first-time homebuyers is holding back economic growth, policymakers can improve near-term prospects by establishing permanent policies that promote job creation and investment, including housing.
However, in the long-run population growth will help expand housing demand. The U.S. is entering a period in which the size of the population attaining the key household formation years of 25 to 35 is on the rise, with roughly 4 million currently aged 35 but 4.6 million aged 22. These “echo boomers” will increase demand for both rental and owner-occupied housing in the years ahead. Ensuring that the right policies are in place to support these future families needs to happen sooner rather than later.